TheStreet.com's Jim Cramer says that as counterintuitive as it seems, there are many stocks that will rise despite this huge bad news.We're back in 1990 again. That was when commercial construction threatened to wipe out the U.S. banking system and the S&P 500 went down 13% in a heartbeat between the spring and the fall.
I trotted out this analogy in the summer to explain what a disaster could look like if the Fed, which at that time knew nothing, didn't do anything or, heaven forbid, did what the clueless Bill Poole wanted them to do, and tighten.
The market's been fighting with 1990 ever since. When I read about the losses and the need for the banks and the insurers to shore up capital -- $7.9 billion for Merrill, Dougie? Say it ain't so! -- I think to myself, "Oh my, it is 1990 when funding became a problem for every major bank." (Tremendous credit to my friend Doug Kass for flagging this.)
There is a big difference, though, between now and 1990. Then you could short every materials and commodities play because you knew that the building industry was paralyzed. Now you short them and you are shorting China and India and Latin America. You go against the industrials that were crushed in 1990 and you are shorting Latvia and Qatar.
The model only works for the pure domestic businesses -- retail, homebuilding, domestic auto and of course all lenders and buyers of credit. Unfortunately I make that part of the market about 30% of the S&P.
Fortunately there is the other 70%.
Now of course when you have these kinds of crises rates go lower, which allows you to pay more for Apple (NASDAQ: AAPL) (Cramer's Take) and Google (NASDAQ: GOOG) (Cramer's Take) and Research In Motion (NASDAQ: RIMM) (Cramer's Take) (but not the unfortunate Amazon (NASDAQ: AMZN) (Cramer's Take), which finally stumbled on margin issues and is probably done for now).
That's why you get these kinds of moves in First Solar (NASDAQ: FSLR) (Cramer's Take) and Garmin (NASDAQ: GRMN) (Cramer's Take). They are intimidating moves that we all know end in various degrees of heartbreak. But we recognize that this is the way the market works in times of slowing. It takes up the Hologics (NASDAQ: HOLX) (Cramer's Take) and the Medcos (NYSE: MHS) (Cramer's Take) and the Intuitive Surgicals (NASDAQ: ISRG) (Cramer's Take) endlessly, until finally everyone owns them and they slip up. Stocks do not go down on overvaluation. Never have, never will. So the short game doesn't work on these companies.
Anyway, we are now in the time when the Fed has to cut, the credit markets are again stunned at the defaults even as they have just begun to happen, and any business with good growth is going to get gobs of points added to its forward price-to-earnings ratio.
Seems wrong. Seems like if Merrill's (NYSE: MER) (Cramer's Take) taking this size of writedown and banks left and right are in trouble and homebuilders are going belly-up that everything should go down.
But it just doesn't work that way.
Random musings: Remember that PMI (NYSE: PMI) (Cramer's Take) and MGIC (NYSE: MTG) (Cramer's Take) must be put and kept on your screen.
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Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Hologic.
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Reader Comments (Page 1 of 1)
10-24-2007 @ 5:23PM
Carletti said...
I think if you look at the current situation, you will come to the conclusion that the bulk of the U.S. housing market is not inelastic. Meaning, you raise any sort of cost in owning a new home in most parts of America, and you can expect sales to plummet. Obviously, circumstances in parts of California are different, as areas over there represent the true makings of a, for-profit, bubble. But, essentially, the pain associated with purchasing a new home, whether psychological or material, is currently very real. And until that pain goes away, this problem will remain unsolved.
But I don't think cutting rates will improve the situation, or will help excel vital consumer spending. Sure, a cut above what may be expected may boost the indexes higher for a day or two but, fundamentally, things will remain as they have been in the past for until the spring of 2008, in my estimation. Therefore, I really do not expect another rate cut to happen this year.